UPM's profit and shareholders' equity in accordance with U.S. GAAP

UPM-Kymmene's consolidated financial statements as prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") differ in certain material respects from Finnish accounting practice ("Finnish GAAP").

The Group's profit in 2003, in accordance with Finnish GAAP amounted to EUR 368 million (2002: EUR 550 million) and in accordance with U.S. GAAP to EUR 398 million (EUR 628 million). In accordance with Finnish GAAP, basic earnings per share in 2003 were EUR 0.70 (2002: EUR 1.06) and in accordance with U.S. GAAP EUR 0.76 (2002: EUR 1.21).

In accordance with Finnish GAAP, the shareholders' equity as at December 31, 2003 amounted to EUR 6,869 million (2002: EUR 6,920 million) and in accordance with U.S. GAAP to EUR 7,163 million (EUR 7,328 million).

The Group’s profit and shareholders’ equity in accordance with Finnish GAAP and U.S. GAAP are reconciled in the following tables

Certain significant business combinations accounted for by the pooling of interests method under Finnish GAAP were required to be accounted for by the purchase method under U.S. GAAP. The more restrictive conditions for pooling of interests accounting under U.S. GAAP which impacted the accounting treatment for such business combinations included post-combination asset disposals, the independence of the combining companies and pre-combination changes in equity interests.

The adjustment from Finnish GAAP to U.S. GAAP also relates to differences in (i) the valuation of purchase price consideration and (ii) the methods of purchase price allocation.

Reversal of goodwill amortization

The U.S. GAAP adjustment reverses the amortization expense recorded under Finnish GAAP and also the related movement in accumulated amortization under Finnish GAAP during the period subsequent to the adoption of SFAS 141 and SFAS 142.

Adoption of SFAS 141 and SFAS 142. Impairment of goodwill

For U.S. GAAP purposes in 2002 the Group fully adopted the provisions of Statement of Financial Accounting Standard 141 Business Combinations (SFAS 141) and Statement of Financial Accounting Standard 142 Goodwill and Other Intangible Assets (SFAS 142). Accordingly, the Group has evaluated its existing goodwill relating to prior business combinations and has determined that an adjustment or reclassification to intangible assets as of January 1, 2002 was not required in order to conform to the criteria in SFAS 141. The Company has also reassessed the useful lives and carrying values of other intangible assets, and will continue to amortize these assets over their remaining useful lives.

As of January 1, 2002, the Group performed the transitional impairment test under SFAS 142 and compared the carrying value for each reporting unit to its fair value, which was determined based on discounted cash flows. Upon completion of the transitional impairment test, the Group determined that there was no impairment as of January 1, 2002, as the carrying value of each reporting unit did not exceed its fair value. The Company has also completed the annual impairment tests required by SFAS 142 during the fourth quarters of 2002 and 2003, which were also performed by comparing the carrying value of each reporting unit to its fair value based on discounted cash flows and determined that no impairment was required.

Revaluations

As permitted under Finnish GAAP, revaluations are possible under certain circumstances. U.S. GAAP generally does not allow such revaluations except in certain respects involving business combinations.

Sale-leaseback transactions

Under Finnish GAAP, certain significant transactions have been accounted for under the sale- leaseback method whereby a sale is recorded, the asset is removed from the balance sheet, the gain or loss is recognized in the profit and loss account, and the leaseback is accounted for as an operating lease. Due to the Group’s continuing involvement with such assets, certain of these sale-leaseback transactions are classified as financing arrangements under U.S. GAAP whereby the assets continue to be accounted for in accordance with the Group’s normal accounting policies and rental payments are applied to the principal of the related liability and interest expense.

Capitalization of interest

Under Finnish GAAP, the Group generally expenses interest costs incurred in connection with the construction of qualifying assets. U.S. GAAP requires that such interest costs be capitalized and amortized over the life of the assets.

Other shares and holdings

Under Finnish GAAP, marketable investments are recorded at cost and are classified in investments held as non-current assets. Unrealised gains are generally not recognized until realized. Under U.S. GAAP, such investments with readily determinable market values are classified as available-for-sale securities as a separate balance sheet line item within non-current assets. Such investments are reported at fair value, with unrealised gains and losses excluded from earnings and reported, net of applicable taxes, as a separate component of shareholders’ equity. If the decline in fair value is considered other-than-temporary, an impairment is reported in the profit and loss statement, which reduces the book value of the investment.

Employee benefits

The Group operates a mixture of pension schemes. In Finland, pensions are arranged in part through pension insurance companies, in part through the Group’s own pension funds and partly directly by the Group. The pension arrangements abroad comply with local practices of each country concerned. For purposes of Finnish GAAP, pension expense is recorded in accordance with local accounting practices in the countries in which employees are provided with such benefits. Under U.S. GAAP, pension expense is recorded on a full accrual basis and reflected in the income statement over the working lives of the employees provided with such benefits.

Derivative financial instruments

Under Finnish GAAP, the Group records currency and commodity derivatives relating to net cash flows in the profit and loss account as such cash flows are received or paid. Currency derivatives related to balance sheet items are marked to market. Payments on interest rate derivatives are recorded in the profit and loss account together with interest payments on related debts according to the accrual method. Under U.S. GAAP all derivatives are recognized on the balance sheet at their fair value. The Group has designated part of its cash flow derivatives as qualifying hedge instruments under U.S.GAAP. Hedge accounting is applied by reporting the unrealized gains and losses on these instruments as a separate component of equity. The fair values of other, non-qualifying cash flow derivatives are recorded in the profit and loss account. Under U.S. GAAP the Group has designated certain interest rate swaps as hedges of the fair value of recognized liabilities. Changes in the fair value of these derivatives along with changes in the fair value of the hedged liabilities that are attributable to the hedged risk are recorded in the profit and loss account.

Share warrants

Under Finnish GAAP, the Group does not recognise compensation expense for share warrants granted. Under U.S. GAAP, compensation expense associated with warrants granted to employees, is measured based on the difference between the quoted market price of the Company’s shares at the end of each reporting period and the current exercise price of each warrant. Changes in the quoted market price impact the compensation expense recognized until the final exercise price is known.

Restructuring costs

Under Finnish GAAP, the estimated costs of employee termination are accrued when the restructuring plan is adopted. Under U.S. GAAP, these costs are recorded in the period the benefits are communicated to the employees among other conditions. Accordingly, certain accruals have been reversed for U.S. GAAP purposes.

Deferred taxes

Under Finnish GAAP, deferred taxes have not been provided on unremitted earnings of associated companies and certain purchase accounting differences. Under U.S. GAAP, deferred tax assets and liabilities are recognized for all differences between the accounting and tax basis of assets and liabilities other than non-deductible goodwill arising on the purchase of shares.